FORBEARANCE
TOO MUCH OF A GOOD THING?

Brodies

Legal News | 21/07/21

The Financial Conduct Authority (FCA) warned consumers in its Mortgages and Coronavirus: Information for Consumers Guidance of 27 January 2021 that:

“If a repossession on your home is stopped and you don’t keep up with payments, the total amount you owe will increase. This is because interest will continue to be charged (plus any fees and charges you may owe according to your lender’s tariff of charges). This means you are likely to get less back later if your property is repossessed and then sold by your lender. If property prices fall in the time between now and when your property is sold, you might get less back, or even nothing, if your property is sold for less than you owe.”

These risks to the consumer are recognised by the FCA in relation to its recent consultation on draft mortgages tailored support guidance, published on 5 March 2021, which provides that in certain circumstances ‘delaying repossession can lead to poor customer outcomes as a result of increased balances and equity erosion.’

The risks of increased charges and ‘equity’ erosion are also, arguably, inherent in hire purchase agreements for motor vehicles, where forbearance is exercised, unless they are sympathetically addressed by the lender. Where there is no prospect of rehabilitation of the hirer’s arrears, continuing to allow the hirer to use the vehicle, which is a depreciating asset, may involve the hirer in increased charges, and reduce the sale proceeds which would be credited to the hirer’s account on the hire purchase agreement eventually being terminated and the vehicle being sold.

The FCA in the Final Notice it issued to Yorkshire Building Society (YBS) on 28 October 2014, in relation to YBS’s handing of mortgage arrears, stated:-

“Call handlers also failed to consider all payment options. In cases of long-term unaffordability, this may have included a voluntary sale by the customer or, in appropriate cases, repossession by YBS. YBS failed to recognise the detrimental effect to customers of delays in agreeing solutions and they failed to focus on minimising and preventing delays. While repossession was properly viewed as a last resort for customers in payment difficulties, management did not take account of the fact that where repossession is appropriate, if it is delayed this causes further significant detriment to customers and leaves them in a worse financial position.”

Firms must of course comply with CONC and the Guidances issued by the FCA in relation to consumers effected by coronavirus but, on lenders considering forbearance, in certain situations, repossession and sale of a vehicle subject to a hire purchase agreement, may be in the hirer’s interest.

Frank Johnstone
Consultant
Brodies LLP